U.S. Employment and Labor Force Analysis

December 12th, 2016

The unemployment rate is consistently a discussion topic for the ARM industry since it is driven by unemployment metrics and the current state of the economy. The official unemployment (U3) rate is the most discussed economic metric, and the most recent Bureau of Labor Statistics report revealed a dramatic decrease to about 4.6 percent – the lowest it has been since August 2007. With over 180,000 jobs created monthly, on average, this is enough to keep the unemployment rate at its current level. However, examining the U3 without mentioning the total unemployment (U6) or labor force participation rate – as both provide substantive context to the overall employment picture – would be like looking at the economy with blinders on.

unemployment

The U6 includes part-time employees and marginally attached workers as part of the equation, so it provides a wider spectrum to analyze employment. Both employment measures fell in November 2016, implying that more of the employed individuals are full-time, not part-time, and there is a lower percentage of persons actively seeking employment. However, despite the U3 rate reaching pre-recession lows last month, the U6 remains elevated suggesting a larger percentage of today’s employed individuals working part-time desire full-time employment, compared to before the Great Recession. As it currently stands, the massive amount of part-time employees implies weakness and limited financial flexibility throughout the economy, which in turn limits the ARM industry’s growth potential since these individuals are less capable of taking on debt. Therefore, the ARM industry should monitor the U6 because if it approaches pre-recession levels, then, presumably, a higher percentage of employed individuals are working full-time, allowing for greater borrowing and debt repayment.

Additionally, the labor force participation rate remains at its historically low levels, amounting to just 62.7 percent in November 2016. This is worrisome as it is well below pre-recession levels. If fewer people are actively seeking employment – which skews the unemployment rate – then the economy is not nearly as strong as one might believe. That said, the labor force participation rate is a little higher than November 2015’s low of 62.4 percent so, hopefully, it will rise in 2017 and into the future since there is a variance of roughly 11 million participants between now and prior to the Great Recession. An increase of this magnitude would add over $500 billion to the U.S. economy under current employment measures and wage characteristics.

As it relates to the ARM industry, unemployment rates have contrasting effects on the economy – it is rarely all good or bad. The following chart broadly states the various effects that high and low unemployment rates have on the economy, many of which affect the ARM industry:

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Given the current state of employment metrics, our analysis focuses on some of the effects associated with low unemployment – U3 and U6 – and the corresponding actions of the Federal Reserve Bank (Fed).

Consumer spending: Since the U3 and U6 rates are relatively low, more employed people are likely generating income. Despite being better-off financially, consumers will probably spend outside of their means leading to increased borrowing. Basically, in the short-run, consumers will be better able to repay their existing debts, while they accumulate new debts into the future – some which would become seriously delinquent. This future bad debt will then be outsourced to ARM companies to collect, increasing the ARM industry’s revenue potential.

Higher interest rates: As a result of an increase in monetary circulation and consumers spending – signifying a healthier economy – the Fed tends to increase interest rates. With the impending Fed meeting from December 14th – 15th, an interest rates rise will likely take place. Although a rate increase appeared to be a done deal in October, the combination of record-high Dow Jones and S&P 500 indexes, and the release of even lower unemployment rate data further substantiates an interest rate hike. Higher interest rates may lead to greater leveraging of debt, which increases the potential for delinquencies and benefits the ARM industry. If unemployment rates stagger upwards, this could be a sign that the economy was artificially strong and increased delinquencies on various interest payments will follow.

In all, the November 2016 employment data release provided much-needed optimism for the economy. While it was not perfect – as the labor force participation rate indicates – many analysts and economists believe the U.S. economy has finally, more or less, recovered from the Great Recession and that we have reached “full employment”. With an eye towards 2017, hopefully, more part-time jobs translate into full-time opportunities and those not participating rejoin the labor force, which would lead to more consumer spending and a healthier economy.

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